India

% annual growth rate:

Sources: M3 from OECD database and nominal GDP from IMF database, as at October 2018.

The medium-term relationship between money and nominal GDP growth in India, 1981-2017

Five-year moving averages of annual % changes, with 1983 being the start of the first five-year period

Comment on monetary trends in India

India has experienced rapid growth of money in recent decades. Because India is a developing country with a high rate of population increase, the demand for bank credit from the private sector is robust. Banks can charge wide margins and grow their balance sheets rapidly. Meanwhile the government has consistently run budget deficit, which need to be financed to some degree from the banking system. The average rate of money growth since 1980 has been almost 17% a year and it has been associated with an average rate of rise in nominal GDP of over 14%.

A perhaps surprising feature of the Indian experience is the consistency of annual growth - in both money and nominal GDP - in the mid-teens. In no year from 1980 to 2014 did money growth run at under 10%. The inflation rate has often neared or exceeded 10%. The Reserve Bank of India has in the last few years tried to dampen inflation pressures, but rarely refers to money aggregates in its policy statements. Policy instruments are understood to include a 'cash reserve ratio' and a 'statutory liquidity ratio', as if the RBI were committed to influencing bank balance sheet size by varying the required ratios of cash and liquidity to the total balance sheet. Typically money grows rather faster than nominal GDP, reflecting the extension of 'the banking habit'. This is the tendency for households to keep an increasing proportion of their assets in bank deposits (which pay interest), instead of in precious metals (which do not), as economic growth facilitates communications and enhances financial education.

Banking and finance in the early years of the United States of America were chaotic. Two of the founding fathers - Thomas Jefferson and James Madison - were hostile to banking, since the issue of paper money led to inflation and default. According to Jefferson,

"...banking establishments are more dangerous than standing armies"

and their impact on the world's leading economies

Institute of International Monetary Research
c/o University of Buckingham
Hunter Street
Buckingham
MK18 1EG

The great economist, John Maynard Keynes, said in his celebrated 1923 Tract on Monetary Reform, that changes in the value of money 'have produced in the past, and are producing now, the vastest social consequences, because, when the value of money changes, it does not change equally for all persons and for all purposes...[I]nflation and deflation alike...has inflicted great injuries'.

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